Where are savvy property investors buying?

Well-known independent New Zealand economist Tony Alexander recently released the results of his monthly survey of mortgage advisers, conducted with mortgages.co.nz. It found that investors were showing greater interest in buying property, a sign not seen for some time. Coincidentally, his latest monthly survey of real estate agents with REINZ also showed signs of renewed investor activity. The proportion of respondents reporting investor interest in cheaper investment properties rose from 34% at the start of this year to 45% now, the highest level in almost two years.

As experienced property investors return to the market, increased interest in relatively inexpensive properties reflects a search for bargains by investors who have gained valuable experience through boom-and-bust property cycles. Whether they focus on rental income, capital gains or both, they clearly understand that earning a reasonable return on an investment property bought now will require holding it for the long term.

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Campbell Scott, a director at Harcourt Hamilton, admits that buying an older three-bedroom house with a living room in a very ordinary part of Maeroa earlier this year broke a principle he had long followed in property investment. He and his wife ultimately chose a property they would not normally have invested in. Previously, he had been looking for apartments or townhouses, which he considered more advantageous as investments and would recommend to others.

He explained that these newer properties offer the following advantages:

1

New homes are often built in Hamilton's older suburbs dating from the 70s of the 20th century, such as Queenwood, Chartwell, Pukete and Dinsdale. Many people choose new builds because they have low maintenance costs, meet Healthy Homes Standards and offer investors more favourable tax treatment. He believes properties that offer reasonable returns and are easy to maintain and manage are well suited to investors, particularly those entering the property market for the first time with little experience.

2

In Hamilton, investment properties of this kind sit in the NZ$600,000 to NZ$700,000 price range. An oversupply of homes in this category and price bracket gives investors more choice. It also means sellers may be more willing to negotiate on price to secure a sale.

Scott says Hamilton has always been a good market. Entry costs remain reasonable compared with expensive areas such as Auckland, and its investment prospects look much better even than those of relatively cheaper areas such as the Bay of Plenty. This is because Hamilton currently has relatively low house prices and comparatively high rental yields, with data showing rental vacancies below 1%. However, he also believes buying an investment property is a highly subjective choice. Detached three-bedroom houses tend to be sought after and easy to rent out, but cost considerably more to buy.
Sharon Cullwick, president of the Hawke’s Bay Property Investors’ Association and an experienced property investor, also believes buying locally is a sensible investment at present. She has already begun looking for her next investment property, hoping to find a bargain and paying particular attention to properties taking a long time to sell. She says she will not rush, because investment purchases require comparison shopping. Her strategy is to keep searching: only after viewing countless properties can she tell which offer good value. Unlike some other experienced investors, Cullwick judges whether a property is worth buying by its rental yield rather than anticipated capital gains that may never materialise.

David Faulkner, general manager of property management at Property Brokers, also favours detached houses as investments, but would look in places such as Gisborne, New Plymouth and Levin, where prices are relatively low and rental properties are currently in very short supply. He believes these areas have considerable potential and offer better rental yields. In Gisborne, for example, a property costing around NZ$500,000 might earn about NZ$550 a week in rent. Remarkably, MBIE figures show annual rent growth in the area of 20%. Faulkner says he would seek a property offering both rental income and capital growth potential. He would therefore buy a property he could add value to, even if that meant increasing his mortgage, and would plan to hold it for at least 10 years.
Two other property investment experts with many years of experience also believe this is a rare opportunity to invest in Auckland.

Tom Rawson, a partner at Ray White Manukau, believes now could be a good time to invest in Auckland, particularly for people who have cashed up or secured finance approval. If he were buying his first investment property now, he would choose a property on Auckland's urban fringe with a larger section and potential for development and renovation. He believes Auckland still needs more homes, so larger sections will offer more added value in future. Others buy purely for rental yield: areas such as Weymouth, Otara and Manurewa are popular with investors because they tend to offer better returns. For example, an investment property in Manurewa in South Auckland that cost NZ$1,200,000 to NZ$1,300,000 last year now costs NZ$750,000 to NZ$800,000, making it quite affordable for many investors. His real estate company recently sold a property on Preston Road in Otara for NZ$670,000, with an estimated weekly rent of NZ$650. With a required deposit of 40%, the repayments on such an investment property would not place buyers under too much pressure. He firmly believes that, whatever property prices are now, a long-term holding could be worth more in 10 years.
Property commentator Ashley Church says he would buy on capital growth potential rather than worry about rental income. Investors who can service substantial loans themselves would buy investment properties in Auckland. Detached properties have always been a good investment choice, but they are becoming increasingly expensive, particularly in Auckland. Apartments were once considered a poor investment, but are now seen as a reasonable option. He also cautions that people on limited incomes need to focus on securing as much rent as possible to cover the mortgage, and may need to look further south to find a property whose income can cover its loan repayments.
To explore these investment views further, YIJU New Zealand spoke again with two experienced local real estate agents, aiming to give readers the most accurate possible picture of the current property market:

Q: Many investors ask whether it is worth buying in the current falling market. Yet we can see that some properties with investment potential are considerably cheaper than last year, and many investors have already bought. What is your view?

James Law：In the current buyer's market, well-resourced buyers and investors have more negotiating power than last year. I therefore believe now is the time for savvy investors with the means to start viewing properties. They need not rush, because more mortgagee sales may emerge in the second half of the year, potentially offering even better opportunities.

Dong Liu：I think many people are always waiting for house prices to bottom out. But everyone should understand that the cycle of property prices doubling every ten years has remained an unchanged fact. As long as your financial circumstances allow, you can buy when the time is right.

Q: Which areas and property characteristics are investors mainly considering for rental investments at present?

James Law：Investors need twice the deposit required of first-home buyers. Many savvy investors are still watching from the sidelines; it seems their time to buy has not yet arrived. A significant adjustment to LVR restrictions may prompt them to buy in numbers. I suggest investors look at areas where properties are easy to rent out in central Auckland, the North Shore, the west and the southeast. Examples include Remuera, Epsom, Westmere in central Auckland; Te Atatu Peninsula, Te Atatu South, Henderson, Massey, New Lynn in the west; and Pakuranga, Flat Bush, Manukau, Mangere in the southeast.

Dong Liu：The government's Healthy Homes requirements for rental properties keep rising each year. At the same time, it is strongly encouraging new housing development and introducing incentives to buy new builds as investment properties. Many people are therefore considering new builds as investments. I currently have quite a few properties with these characteristics available; please feel free to contact me for advice.

Disclaimer: The views above do not represent YIJU's position and are provided for reference only.